commercial banks restructuring: experiences of...
TRANSCRIPT
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Commercial Banks Restructuring:
Experiences of East Asian countries
C n Văn L c (PhD)
presented at the international workshop on
Commercial Banks Restructuring
Hanoi, 21 December 2011
21/12/2011 C.V.Lực/BIDV 1
http://www.bized.co.ukOutline
1. Commercial Bank Restructuring: Some basic
issues
2. Commercial Bank Restructuring: Experiences of
East Asian countries
3. The current situation of Vietnam’s banking system
4. Structure of Vietnam’s banking system
5. Restructuring Vietnam’s banking system: Some
recommendations
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http://www.bized.co.uk1. Commercial Banks Restructuring:
Some basic issues
• What is “Commercial Bank Restructuring”?
Measure packages for institution, finance and legal framework for
saving failed banks and restoring the banking system (Waxman et
al. 1998, WB).
• Commercial Bank Restructuring - When?– In normal conditions, special difficulties arise (liquidity squeeze, NPLs,
customer complaints,…) or
– Banks’ problems which affect 20 per cent of total deposit balance (Lingren et
al. 1999).
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http://www.bized.co.uk
• Targets of restructuring commercial
banks (Dziobek & Pazarbasıoglu 1998, IMF):
– Restoring banks’ liquidity and profitability
– Strengthening banks’ capacity of financial
intermediaries
– Enhancing public confidence
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1. Commercial Bank Restructuring:
some basic issues (Cont.)
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Finance
Performance
Institution
What is Restructuring?
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Restructuring
http://www.bized.co.ukFinance Restructuring
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Improve Balance Sheet
Increase equity capital
Deal with NPLs
Government
Shareholders
Write-off
Recovery
http://www.bized.co.ukPerformance Restructuring
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Improve profitability
Business Strategy
Dismissal
Corporate Governance
Policies
Organizational Structure
http://www.bized.co.ukInstitutional capacity enhancement
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• Deposit insurance
• Lender-of-last-resort
Supervision Management
Model
Method
Resource
Law on banking restructuring
Relevant regulations
Accounting and Auditing
http://www.bized.co.uk2. Commercial banks restructuring:
Experiences of East Asian Countries
• 02 Research Projects:
– Luc Can and Mohamed Ariff (2009),“Performance of
East Asian banking sectors under IMF-supported
programs”, Journal of Asia Pacific Economy, 14(1), 5-26
– Luc Can and Mohamed Ariff (2009),“IMF Bank-
Restructuring Efficiency Outcomes: Evidence from
East Asia”, Journal of Financial Services Research, 35(2),
167-187.
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http://www.bized.co.ukContext
• Financial crisis in 4 countries (Indonesia, S.Korea,
Philippines and Thailand) 1997-1998
• IMF’s support through 4 years (1997-2000)
• Conditions: to implement measures as proposed
and required by IMF.
• 3 comprehensive measure packages for the
financial sector.
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http://www.bized.co.ukPolicy Measures Package
for Financial Sector
1. Group of measures, which stabilizes the
finance-banking system:– Liquidity Support (with conditions)
– Blanket Guarantee
– Monetary Policy tightening (interim)
– Ceiling Borrowing Rates
– Identification and closure of insolvency banks
– Loss Sharing of closed banks with creditors, Maturity
Extension.
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2. Group of measures, which restructures
Finance-Banking Sector:– Making review on Financial Institutions
– Making closer regulation on loan classification and risk
provision
– Establishment of clear itinerary for banks to meet capital
adequacy requirements (CAR)
– Intervention in insolvent banks
– Provision of guidance on methods of capital injection and
NPLs purchase of banks
– Giving closer regulations on bank licensing
– Itinerary for State divestment in supported banks.21/12/2011 C.V.Lực/BIDV 12
Policy Measures Package
for Financial Sector (Cont.)
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3. Measures group, which renovate institution:– Establishment of Financial Sector Restructuring Organization
– Establishment of National AMC
– Improvement of independence of Central bank and Banking
Supervisor
– Enhancement of supervision on banks
•Consolidation of disclosure, accounting and auditing
standards
– Issuance of regulation on risk management
– Issuance of New Law on Bankruptcy
– Simultaneous Corporate Restructuring.
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Policy Measures Package
for Financial Sector (Cont.)
http://www.bized.co.ukPolicy Measures Package for
Banking Restructuring
1. Liquidity Supports to prevent failures
2. Closure of insolvent banks
3. Merging (into bank of good performance) and/ or
Assumption (M&A)
4. Nationalization of private banks, eventually
divestment
5. Attraction of outside capital, including foreign
investors
6. Close supervision on weak banks.
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http://www.bized.co.ukTable 1: Measures and Information of
Restructuring of 4 SEA CountriesMeasures Indonesia Korea Philippines Thailand
Liquidity Supports (US$ bil; % GDP) 21,7 (18%) 23,3 (5%) 0,5 (0,8%) 24 (20%)
Number of Failed banks 70/198 0 1/49 1/15
Number of other Failed FIs 0 200 25 59/91
M & A 4/7 SoCB 11/26 12/44 3 Banks &
12 FC
Nationalization of FIs 12 4 1 4
Permission of foreign investors’
ownership of Controling stocks
Yes Yes Yes Yes
Closer supervision on weak FIs Yes Yes Yes Yes
Change in Bank Leadership Team No 6/11 No 3/11
Number of Banks after Restructuring 102 (out of 198) 14 (out of 26) 41 (out of 49) 14 (out 15)
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Source: Claessens et al. (1999) and Central Banks; Luc Can and M. Ariff (2009).
http://www.bized.co.ukResearch Model and Method
• 4 countries financially supported by IMF (Indonesia,
South Korea, Philippines, Thailand)
• Sampling: 138 CBs
• Period of 1991-2005; divided into 3 stages: Prior to
(1991-97), During (1998-2000) and Post to (2001-
2005) the Period of IMF- Financially Supported.
• Comparison prior to and post to IMF-financially
supported period
• Ghosh Model (2006) used to measure structure and
efficiency of banking system and DEA Model used to
measure efficiency of either of CBs
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Table 2: Research Sample Description
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Indonesia South Korea Philippines Thailand Total
SoCBs 5 2 2 5 13
Private Banks 61 24 30 10 125
Listed Banks 24 21 21 8 74
Non-listed Banks 42 5 11 6 64
Non-restructuring
Banks
21 3 17 0 41
Restructuring Banks 45 23 15 14 97
Of which:
Failed:
M&A
Capital Supports
divestment (Eventually)
Foreign Banks’ Participation
Total number of banks
29
4
12
6
12
66
14
5
4
0
8
26
8
6
1
0
14
32
3
7
4
3
10
14
54
22
21
9
44
138
Market share (%) 82 68 77 75
http://www.bized.co.ukEfficiency of Restructuring
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Table 3: Comparison of structure between the period prior to
1996 and Post to CBs system restructuring (2005)
Indonesia South Korea Philippines Thailand
Total Assets/ GDP (%)
Number of Branchs/ 1000 people
53 64
6 5,2
105 140
13,8 13,4
97 82
7,7 7,2
120 112
9,6 9,9
Market share of total assets of 5 biggest banks (%)
Market share of total assets of SoCBs (%)
Market share of total assets of Banks with Foreign Participation (%)
71,4 77
62 52
5,2 22
49 65
5 10
2 12
51 67
13 18
4,5 1,2
71 78
21 35
1,3 5,5
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Table 4: Comparison of activities of CBs system between the
period prior to 1998-2000 and Post to Restructuring 2001-05
Efficiency of Restructuring (Cont.)
Indonesia South Korea Philippines Thailand
M2/GDP (%)M2/GDP (%)
Bank credit/ GDP (%)
59 54
31 20,5
127 125
72 90
62 56
48 35
105 96
103 77
Cash/ Deposit (%)
Overdue Loans/ Total loans (%)
ROA (%)
9,5 11
37 8,5
-2,4 1,7
5,2 3,5
13 2,4
-2,3 0,75
11,2 10,7
12,6 13,5
0,6 1
8,4 10,5
33
-4 0,3
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The results of research on “efficiency” of policy
measures package for restructuring carried out in 138
CBs of 4 countries show that:
• Restructuring is necessary
• Closure of weak banks is a right policy in term of economic
efficiency
• Banks upon M&A shall be suffering loss (less efficient) in short
term
• Nationalization, eventually divestment for private investors
brings better efficiency before being restructured
• Attraction of outside private capital, including foreign investors,
brings better efficiency before being restructured.
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Efficiency of Restructuring (Cont.)
http://www.bized.co.ukLessons learned
1. Restructuring is necessary upon financial crisis or bank
in difficulties
2. Stabilizing financial system and restoring public
confidence as a first strong measure
3. Emergency measures to prevent bank run from banking
system while ensuring protection of depositors’
interests
4. Central bank’s liquidity supports needed but accounting
for unwinding (divestment)
5. Establishment of legal framework and itinerary for
restructuring.
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6. Specific regulation on methods and criteria of asset
pricing and bank classification
7. Conditions and itinerary to meet CAR are vital
8. Development of financial solutions for restructuring
costs
9. State leadership role and political decision as an
indispensable factor
10. Simultaneous corporate restructuring needed.
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Lessons learned (Cont.)
http://www.bized.co.uk3. Current situation of banking market in Vietnam
Pressures (concerns) on high inflation and interest
rates,
“Volatilized” credit
Black credit crash sends disorder, instability
Small capital size of banks
Less efficiency to meet international standards
Overdue loans liquidity risks getting worse
Inappropriate and unsustainable income structure,
Accounting scheme of big difference in comparison
with international practices
Unsound competitiveness.
21/12/2011 C.V.Lực/BIDV 23
http://www.bized.co.ukFigure 1: Inflation (CPI) of Vietnam
compared to the Region (%, year-on-year)
Source: Investment research by Citi, EIU (2011).
Inflation is always a great concern for Vietnam.
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http://www.bized.co.ukFigure 2: Size of credit of Vietnam and other countries (%
GDP)
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Source: WB Financial Sector Indicators 2011.
http://www.bized.co.ukFigure 3: Credit growth of Vietnam compared to the
region (%, year-on-year)
Source: Investment research by Citi, EIU (2011).
High inflation is partly due to high credit growth and “inflation
import”.
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http://www.bized.co.ukFigure 4: Credit, deposit and money supply
growth of VN (%, year-on-year)
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Source: State Bank of Vietnam.
For many years, credit growth is higher than deposit growth.
http://www.bized.co.ukFigure 5: Base interest rate/refinancing rate of
VN compared to the region
(%, end of period)
Source: Investment research by Citi, EIU (2011).
In the circumstance of high inflation, it is very difficult to keep a low
level of interest rate.
21/12/2011 28C.V.Lực/BIDV
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Figure 6: USD against VND and other currencies
in the region (% changes, end of period)
Source: Investment research by Citi, EIU (2011).
Unlike many other Asian countries, VND depreciated (against USD)
since the global financial crisis in 2008.
21/12/2011 29C.V.Lực/BIDV
http://www.bized.co.ukCapital adequacy ratio is at an average level; but
CAR is still low compared to the region
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Figure 7: CAR of Vietnamese commercial banks compared to
the region (2010, %)
Source: WB, FitchRatings 2011.
http://www.bized.co.ukCredit risks of Vietnamese banking system at
high level in the region
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Source: FitchRatings, IMF, Central banks.
http://www.bized.co.ukFigure 9: Profitability (ROE, %, in 2010)
at low levels (according to Fitch)
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Source: Fitch, IMF, Central banks.
http://www.bized.co.ukHowever, Vietnamese commercial banks always
have a lot of liquidity risk
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Source: FitchRatings 2011, Central banks.
http://www.bized.co.ukFigure 11: Increase in inventory index for the 10
first months of 2011 (%, against the same period
in 2010)
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Source: General Statistics Office, MPI.
http://www.bized.co.uk4. Structure of Vietnamese banking
system• Main force in the financial sector
• Do we have too many banks? (not really!)
• Joint-stock banks play more and more
important roles
• Roles of non-bank institutions are still
vague.
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http://www.bized.co.ukVietnamese financial market
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Figure 12: Scope of Vietnamese financial market and other Asian
countries (% GDP 2008)
Source: Calculated according to Data from Beck et al. (2010) và WB Financial
Development and Structure Data, updated in October/2010).
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Table 5: Structure of Vietnamese financial market in 2010
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Financial institutions Asset share of
financial sector
Regulator
Banking and non-banking
5 state-owned commercial banks* (incl. Vietinbank & VCB)
2 development/policy banks
36 joint-stock commercial banks
5 joint-venture banks; 5 wholly foreign-owned banks
46 foreign bank branches and 48 representative offices
915 credit funds and credit cooperatives.
17 finance companies; 13 financial leasing companies.
70%
State Bank of Vietnam
(SBV)
Bonds (Gov’t, corporate, bank bonds) 8.4%
Insurance: 53 insurance companies 0.84% Ministry of Finance
Securities:
102 securities companies, 22 fund management firms
6 custodian banks, 1 designated settlement bank
770 firms and 557 bonds listed on 2 stock exchanges
20%
State Securities
Commission (MOF)
Other: 1 state-managed social insurance fund
Deposit Insurance of Vietnam (DIV)
Informal financial system
1.1%
n.a.
n.a.
Government
SBV
Unregulated
Sources: SBV, World Bank, SSC, author’s calculations.
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Structure of the banking sector
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Figure 13: Percentage of users of banking services
(2009)
Source: WB, ADB 2010.
http://www.bized.co.ukFigure 14: The number of branches of
commercial banks/100,000 adults in 2009
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Source: WB, Central banks.
http://www.bized.co.ukFigure 15: The number of ATMs/100.000
adults (in 2009)
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Source: WB, Central banks.
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Figure 16: Ratio of deposits and loans[%, 2001 (left hand) vs. T10/2011 (right hand)]
Source: SBV 2011; A consultant project report by IBM Belgium,
DMI, Ticon and TAC 2007.
http://www.bized.co.uk5. Restructuring the banking system in
Vietnam: Recommended measures
• To combine both overall measures and individual
measures
• The group of overall measures:
– Liquidity support
– Continue to maintain ceiling rate?
– Review, amend regulations on debt classification and risk
provisioning
– Set up an itinerary for raising chartered capital (upon application
of Basel II)
– Review regulations on licensing
– Increase roles of Deposit Insurance Institution
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http://www.bized.co.ukRecommended measures (cont.)
• The group of overall measures (cont.):
– To set up a banking system restructuring agency?
– To guide regulations on selling-buying overdue debts in more
open way (China securitized overdue debts since 2004)
– To speed up investigation and supervision
– To promulgate regulations on risk management
– To increase independence of State Bank and banking
supervisory agency
– To restructure the system of non-bank institutions
(including VDB and Vietnam Bank for Social Policy)
– To resolutely restructure SOEs and invest, restructure the
stock and real estate market.
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http://www.bized.co.ukRecommended measures (cont.)
• The group of individual measures for commercial
banks:
– To set up criteria and make assessment, classification of commercial
banks (CAMEL??) to restructure and allocate credit
– Ailing banks should be merged or supported by a “healthy” bank
– Injecting State capital to save some banks is necessary, but it requires a
suitable itinerary of capital divestment
– To allow private investors, including foreign investors, to
repurchase/supplement capital partly to problem banks
– In the project of restructuring commercial banks, it is necessary to set
up financial alternatives for restructuring costs (guarantee for bond
issuance?).
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http://www.bized.co.ukThe group of individual measures for
commercial banks (cont.)
– Together with adoption of new debt classification, to
completely deal with NPLs and continue to raise
minimum capital
– To set up, implement and monitor implementation of
itinerary of restructuring the banking system (often
within 3-5 years)
– To require each commercial bank to restructure
(finance, organization, activities, etc) and renovate
corporate governance in banks.
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http://www.bized.co.ukOther measures
• To doing more researches on experiences of
restructuring the banking system of countries in the
Asian region (objectives, itinerary, results, etc)
• To draw lessons from the former restructuring stage
(1998-2001)
• To implement both “renovate” organization and
performance of State Bank (the problem of
“legislation”)
• Political determination and goodwill is especially
important.
• To develop bond market and debt transaction market.
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Other measures???
• Welcome your discussion
• Thank you
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